LULU: SURVEY RESULTS PREQUEL #3/ COMPETITION

Takeaway:In looking at those who left LULU -- where did they go? Can they win them back? Here's what we learned last time. Update on 3/24.

In looking at those who left LULU -- where did they go? Can they win them back? Here's what we learned last time. Update on 3/24.

Here's the third note in a series of five in advance of our LULU Consumer Survey results on Monday March 24th at 11am ET. When we polled consumers three months ago, we pulled away some clear insights. The concerns largely outweighed the strengths, which foreshadowed the company's results, and ultimately the stock price.

We're re-running our survey to gauge the incremental change over the past quarter, with the goal of seeing whether LULU is making progress (which could get us more constructive on the name) or not.

In preparation for 'Round 2' we want to offer up some of the notable takeaways from our last survey, as they'll be framing the discussion on Monday.

COMPETITION

We asked people who took business away from LULU where they are spending their dollars. This is really a 2-part answer. First off, we ask which stores/brands they're now shopping instead of LULU. You'll find those results in the first chart. The columns don't add up to 100% because someone could have converted one visit to a LULU store where they bought a full outfit into one visit at each of three different stores. The big winner is Nike at 34% of visits, followed by VS/Pink, UnderArmour, and Old Navy (which was a lower-income phenomena).

The more important part of the analysis, we think, is in the following chart, which shows the dispersion of items purchased by dollar value. All of the columns add up to 100% -- meaning that it represents the dispersion of where the actual sales went, not just where the people shopped. Again, Nike came out on top, but a surprise to us was how close UnderArmour came to Nike. The reality is that Nike has been trying to build a women's business for the past two decades, and UA seems to be doing in about 5 yrs what took NKE 20.

The punchline, however, is that there are two companies in all of retail that we wouldn't want to lose share to -- Nike, and UnderArmour. When those two win share, they rarely give it back.

WILL YOU GO BACK?

We asked the people who had left LULU -- or taken some of their purchases away for whatever reason -- if they would go back to LULU again in the future. The good news is that about 44% said that they are likely to go back, or (18%) will definitely go back. The bad news is that 10.7% said that they will 'definitely not' return, and 21.4% said that they're 'unlikely' to return to LULU. That's 32% of the people we surveyed who have taken a part of their business elsewhere that LULU is going to have to fight to get back. Out of all the questions in our survey, this is one of the key issues that we'll be looking at to see how things have changed on the margin over the past three months.

"Merger discussions between apparel chain J. Crew Group Inc. and Japan's Fast Retailing Co. have broken down, people familiar with the matter said…Fast Retailing..walked away from discussions with J. Crew management and the company's private-equity owners soon after The Wall Street Journal and others reported on the talks in late February, the people said."

"While it isn't clear exactly why the talks broke down, some of the people said the fact that they became public played a role. The end to the discussions could prove temporary, and both companies could renew them down the road, the people added."

Takeaway: Kinda funny how the day this story broke several weeks back, everyone assumed it was baked. Even we assumed it would go through. After all, it makes sense. Fast Retailing has been looking to buy a US concept for the better part of three years. Just because talks broke down with Drexler & Co, it doesn’t mean that Fast is done. Quite the opposite, in fact. We’d expect them to accelerate their search. There are plenty of options – at prices below the $5bn price tag rumored for JCrew. We have some ideas. Let us know if you care to discuss.

"...the Jordan Flight Runner is the Jordan Brand's first-ever running specific model. The innovative runner aims to take comfort and performance to the next level with a Dynamic Fit lacing system and Zoom Air cushioning.

"The Jordan Flight Runner is set to officially release May 1st, and will retail for $110."

Takeaway: This might seem odd to some people, but it actually makes perfect sense. Jordan broke out of being just a Basketball brand a decade ago. The NBA is joined by the NFL, MLB, PGA and Lacrosse, among other sports, as places where you can find athletes wearing Jordans. Then why should the brand sidestep the most popular silhouette in the US? (yes, that’s running). We’re not sure if they’re geared for fashion or to actually run in, but there are two things we know…1) they’re long overdue and 2) they’ll sell. Good move by Nike here.

FOSL - FOSSIL GROUP TO SUPPORT GOOGLE’S EXTENSION OF ANDROID INTO WEARABLES

"Fossil Group, Inc. announced today they are working together with Google supporting the extension of Android into wearables with Android Wear. As part of the launch, Google also announced the release of a Developer Preview of Android Wear, helping them build rich wearable experiences for their existing Android apps."

Takeaway: Good move by FOSL here. It is the undisputed king of the mass-market watch. But it faces a bit of a hurdle – from a secular standpoint. Odds are that 90% of the people reading this are wearing a watch. Now go and poll a group of kids under the age of 18 – across all income and demographic groups – and come up with a ‘watch ratio’ for that group. It certainly won’t be over 50%, and our sense is that it’ll struggle to get above 25%. Kids simply don’t wear watches anymore. Their watch is their phone. Fossil is smart to team up with Google and anyone else out there that can maximize its relevance with a younger consumer.

"Gap Inc. announced today its plans to open five franchise-operated Old Navy stores in the Philippines in 2014...The first two Old Navy stores will open in Manila in March and there are plans to open three more stores in the second half of the year for a total of five Old Navy stores in 2014."

"Old Navy is partnering with Stores Specialists, Inc. to open the stores, which already operates Gap brand and Banana Republic stores in the Philippines."

Takeaway: We don’t like Gap for a number of reasons. But this move is fine by us. Makes sense to go into a new market like the Philippines with a partner. And Old Navy, with its low price points, is ideally suited for a poor country like the Philippines, which has a GDP less than half the size of Wal-Mart’s annual revenue base.

"Herbert Hainer, Adidas' CEO, will become the new president and business chairman of German soccer club Bayern Munich, after the resignation of Uli Hoeness."

"In a subsequent conference call, the FC Bayern München AG supervisory board resolved the following: Herbert Hainer (59), Adidas AG CEO and previously deputy chairman of the FC Bayern München AG supervisory board, is appointed chairman of the supervisory board, effective immediately and until further notice. This decision was unanimously approved by the supervisory board."

Takeaway: Seriously Herbert? Let’s face some facts…you’re not exactly knocking the cover off the ball in your day job. Adidas needs more of your time, not less. You already endorse Bayern Munich, so what are the added benefits of being the President of the Club? This is reminiscent of when Mike Ullman became Chair of the Dallas Federal Reserve and joined the Board of the NRF. Keep your eyes on the prize boys…

"The Bentonville retail giant is having a grand opening of its 'Walmart To Go' store on March 19. The store is at 1300 S. Walton Blvd., less than a mile from the corporate headquarters."

"The store is approximately 2,500 SF, a small fraction of the size of the company’s small-format Neighborhood Market grocery stores. The store will sell gasoline as well as items usually associated with convenience stores."

“’It’s a convenience store test concept,’ Barnett said. ‘We’re not planning any more across the country.’”

Takeaway: It’s so easy to knock Wal-Mart – that’s what happens when you get as big as it is. But the truth is that we give it credit for trying out new concepts. We wish we could say the same for other mature retailers, who seem so comfortable in their no-growth mediocrity. Our sense is that WMT sets up a few more of these concepts with one purpose in mind – to collect data about the kind of products people buy in these formats. Aside from testing new products in a very small concentrated space, it can use any insight gathered to add to its massive database that fuels merchandising decisions at its 4,000+ large format stores.

"Six-in-10 (60%) of those who knew about any data breaches at notable retailers, such as Target and Neiman Marcus, hold the merchant responsible for preventing future incidents of a data breach. The '2014 Consumer Reaction to Financial Data Breaches Study' of more than 2,000 adult U.S. consumers from Feedzai and Harris Interactive also found that 43% think nothing is more aggravating than getting credit/debit card data stolen."

"Among U.S. adults who are aware of any data breaches, 60% believe merchants are responsible for preventing future incidents, while 13% believe responsibility falls on banks. Only 5% of these adults feel it is the consumer’s responsibility…"

Takeaway: We’re surprised to see that only 60% of consumers blame the retailer. Don’t get us wrong, 60% is a massive number – especially given that the survey was not confined to people that were actually harmed or in any way affected by the breach. But 40% of Americans giving retailers a free pass as it relates to blame for the risk is much greater than we thought.

"Deckers' first 'brand showcase' store, located at the firm's headquarters in Goleta, Calif., opened to the public today. The 8,000-sq.-ft. location will serve as a testing ground for new product and technology, in addition to offering regular collections from Deckers labels including Ugg Australia, Teva, Sanuk, Tsubo, Ahnu, Mozo and Hoka One One."

"The flagship also will allow shoppers to customize product in-store via iPad, with free shipping or in-store pick-up options."

Takeaway: We’re so surprised when we see companies open these ‘brand showcase’ stores. The reality is that the consumer could care less that the company Decker’s exists. They might love one of the brands, like UGG. But just because Decker’s owns a bunch of brands that help it diversify seasonally does not mean that the consumer wants to see them all. We’d rather see separate retail stores for each concept in the appropriate location to best target each consumer.

"The project, planned for the subway station concourse at 59th Street-Columbus Circle, envisions a 30,000-square-foot underground shopping mall populated by beauty, fashion, accessories and food shops. There’s space for 30 shops, which will be divided into three categories: grab ’n’ go, retail stores and marketplace."

"American Apparel Inc. has missed the filing deadline for its annual report with the Securities and Exchange Commission as it struggles to fund its operations and pay interest on its debt."

"The company notified the SEC Tuesday that it had missed the Monday deadline...for its annual report...because it was focusing on putting together a plan to regain compliance with the listing standards of the NYSE MKT exchange. The exchange notified American Apparel that it needed to file a plan to regain compliance by Friday and make progress toward meeting the plan by April 15."

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CHART OF THE DAY: The Fox In the Hen House

The Fox In the Hen House

"I am sometimes a fox and sometimes a lion. The whole secret in government lies in knowing when to be one or the other."

-Napolean Bonaparte

The old farm yard analogy of a fox licking its chops and entering the proverbial hen house can likely be applied to many current situations. On the global macro front the situation in the Ukraine and stand-off, of sorts, between the West and Vladmir Putin is likely the most relevant.

Certainly, the foxes in the Kremlin are licking their chops since annexing the former Soviet territory of Crimea. Is this the beginning of another Cold War? It is likely not. But the ineffectiveness in combating the Russian move certainly increases the likelihood of additional and more aggressive moves by the Russians. (By ineffectiveness, I read yesterday that the current, proposed sanctions by the U.S. would freeze the assets of a mere seven Russian citizens.)

Late yesterday, the first fatality occurred as a Ukrainian military base in Crimea was overtaken by Russian / Crimean troops. Albeit only one serviceman was shot, and reports are still conflicted as to how and by whom, the response by the leadership in the Ukraine is to now allow their military to use force as needed in Crimea.

Perhaps most telling yesterday was Vladmir Putin’s hour long speech, specifically this excerpt:

“Our Western partners headed by the United States prefer not to be guided by international law in their practical policies, but by the rule of the gun. They have come to believe in their exceptionalism and their sense of being the chosen ones. That they can decide the destinies of the world, that it is only them that can be right.”

Clearly, the old Russian fox Putin is licking his lips.

Back to the Global Macro Grind . . .

Assuming hostilities don’t accelerate in Crimea, the most significant impact from the annexation of Crimea by Russia is likely to be on the upcoming midterm elections. The media has been very clearly painting President Obama and his administration to have been ineffective in dealing with the Russians and Obama’s approval rating is starting to reflect as much.

According to the RealClearPolitics approval aggregate, Obama’s disapproval rating is now 52 and his approval rating is 43, for a spread of 9. Gallup runs the longest running approval poll and the spread in that poll is even wider. Currently, according to Gallup, Obama’s approval is at 41. This is the worst approval rating of Obama’s Presidency and lower than President George W. Bush at the same time in his Presidency.

The fact that President Obama’s approval rating is in free fall is likely to be felt by the Democrats in the upcoming midterms. In fact, the generic congressional poll aggregate, which effectively asks the respondent to say whether they would vote Republican or Democrat in congressional races, is basically tied (with the Republicans actually leading in some polls). This is an inflection point as the Democrats have led in this generic poll very consistently since the last mid-term elections.

Speaking of polls, yesterday our daily Hedgeye poll asked, “Are you feeling the price pinch at the breakfast table?” More than 75% of the respondents responded, yes. This obviously shouldn’t be a surprise given the fact that coffee, orange juice and lean hog prices have had almost parabolic moves in the year-to-date. Of course, for those consumers who don’t eat breakfast (or eat for that matter), they may yet be immune to food based inflation!

As my colleague Christian Drake highlighted yesterday in an intraday note, inflation is also percolating in other parts of the economy. Specifically, CPI Services growth continues to hold above 2% and the growth trend looks similar even if you strip out the Shelter and Energy components of the Index.

Even as most consumers are seeing inflation, the bigger question will be whether the Fed sees it. Fed Chair Janet Yellen will get a chance to address this in her first news conference today at 2:30 pm (following the Fed statement at 2:00 pm). Certainly the stock market is seeing the consumer getting squeezed as well, as the consumer discretionary and consumer staples sectors are both down on the year.

Speaking of the stock market, despite the somewhat tepid return in the year-to-date, (the SP500 is only up just over 1% in the year-to-date and most major markets are down on the year), the latest US Investor's Intelligence poll shows that a predominance of investors remain bullish.

According to the poll:

Bearish sentiment is unchanged at 17.4%;

Those expecting a market correction increases to 30.6% from 27.5%; and

Bullish sentiment decreases to 52.0% from 55.1%.

To be fair, it is likely difficult to envision much of a correction when the stock market is barely up on the year, but nonetheless investor complacency, at least based on this polls, seems noteworthy to say the least.

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